Conversations With… Benjamin Segal
With much of the world’s population, GDP and market capitalization found outside the U.S., we believe the case for global diversification is a powerful one. Indeed, while the U.S. remains the world’s largest economy and biggest consumer market, it seems unwise to ignore the vast opportunities beyond our borders.
Benjamin Segal, head of Neuberger Berman’s Global Equity Team and manager of its International portfolios for over a decade, has consistently focused on quality as a means to identify attractive stocks across non-U.S. markets. We spoke to Segal about his investment discipline and how it helps him navigate potential opportunities and challenges in the team’s sizable investment universe.
Why should investors look outside the U.S. for investment opportunities?
I think you have to look at non-U.S. companies in terms of their significance in the global marketplace. From the cars we drive, to the flat-screen televisions we watch at home, to the beverages we drink every day—the businesses that produce many of these products are outside our borders. While U.S. and non-U.S. markets alike can experience economic uncertainty, accessing international opportunities remains very important and can provide the potential for growth over the long term if you are selective and methodical in your approach.
Our strategy is based on bottom-up stock-picking and fundamental analysis, so we are focused on finding companies that can turn challenges into opportunities, as opposed to predicting economic outcomes. Where a company is based is much less relevant than the end markets in which they operate. To us, it’s much more about companies than it is about countries.
How do you think about building a portfolio? How does it set you apart?
We generally hold companies that we think have better quality and growth potential than the overall market. We define “quality” by balance sheet, growth and profitability metrics, and “reasonable price” by companies we think can realize a minimum of 50% appreciation in their share price over approximately three years. It’s an approach that we believe can deliver strong performance over time.
With that in mind, I would say a key differentiator for us is our ability to execute our discipline, not just in large-caps, but across the market cap spectrum, including small- and mid-cap stocks as well. Through screening and fundamental analysis, we try to build an understanding of the entire value chain in various industries, which often leads us to smaller companies with niche businesses. They are not always part of the MSCI EAFE benchmark and are therefore less well known and understood.
So we think the risk/reward dynamic can be much more favorable. However, in our portfolio construction, we balance these names with larger multinational companies that, in our view, are capable of compounding returns year after year.
Given the large investment universe, how do you pick stocks?
We follow three main steps: quantitative screening, strategic analysis and valuation. Screening helps us narrow thousands of stocks to just a few hundred companies that have demonstrated good track records of profitability and growth. After that, our strategic analysis asks the question: Is this record of profitability and growth sustainable? We look to identify what is unique about each company’s competitive position, product capability and leadership in order to build conviction.
Primary research is very important to us. We participate in over 1,000 company meetings a year, which provides a better understanding of the companies and their markets. And we talk to competitors, customers, suppliers and regulators, as well as industry experts, so we have a holistic view of potential investments. We then channel our insights into a proprietary discounted cash flow model for an estimate of the upside potential of a given stock over a three-year period. We analyze the sensitivity of that estimate to a range of plausible revenue, margin, capex and balance sheet assumptions to quantify stock level risk.
Our aim is to build a portfolio of names that is diversified across sector and region—which is not sensitive to any one theme or economic scenario.
You mentioned your primary focus is on companies not countries. Can you elaborate?
We are less focused on countries than we are on businesses where we can find sustainable organic growth. Switzerland is a good example of a country that would be easy to overlook due to its size and population of only eight million people. However, it is home to some of the world’s largest consumer goods and health care companies. Due to domestic market size constraints, these companies globalized their businesses from the outset and, as a result, have gained a significant early-mover advantage over some U.S. companies who were late entrants to some of the faster-growing markets. The global nature of these businesses has given them some protection from the economic downturn and slow recovery in developed markets.
In developed markets, we generally favor companies with well-positioned franchises or brands that operate globally and are able to manage through current economic conditions. We have also identified a few select emerging markets companies that enjoy durable competitive advantages, such as innovative technologies or a dominant market share in niche areas that are growing.
Tell us about your approach to risk.
As bottom-up stock-pickers, we seek to mitigate risk at the security level through rigorous fundamental analysis of potential investment opportunities. We undertake an in-depth qualitative assessment of businesses and sensitize cash flow models to ensure we have an understanding of the key risks to our investment case. From this analysis, we seek to identify the companies that we believe have the best risk/reward characteristics.
At the portfolio level, we have certain guidelines to help manage overall risk. They include limiting the number of investments under normal circumstances to 60 – 100 stocks, depending on the type of portfolio. We will typically hold a maximum of a 4 – 5% position size in any one stock and not more than 15 – 20% of a portfolio will be invested in the emerging markets. We also have in place +/- 10% to 15% sector and country constraints. And we make sure our largest investments are well diversified across countries, sectors and market-cap ranges. Through these risk controls and our fundamental analysis, we seek to limit the beta and standard deviation of the portfolio, such that stock selection drives performance.
We also benefit from Neuberger Berman’s broader risk controls. The firm’s Portfolio Analysis and Risk team runs performance and risk statistics monthly for our portfolios and an independent committee monitors our risk levels.
Any final thoughts?
In our view, stock selection is the key to investing in international markets. Where companies are domiciled is not what really matters; it’s about identifying those individual companies that have the greatest risk-reward potential. That’s why we focus on companies that we believe have the potential to sustain growth and generate returns, but also trade at discounted valuations. When economies and markets are in flux, we think a well-diversified portfolio—by geography, industry and company size—of high-quality companies should offer attractive risk-adjusted return potential for the long-term investor.
An investor should consider Neuberger Berman International Equity Fund’s investment objectives, risks and fees and expenses carefully before investing. This and other important information can be found in the fund’s prospectus or summary prospectus, which you can obtain by calling 877.628.2583. Please read the prospectus or, if available, summary prospectus carefully before making an investment. Performance data quoted represent past performance, which is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, potential political instability, restrictions on foreign investors, less regulation and less market liquidity.
Governments of emerging market countries may be more unstable and more likely to impose capital controls, nationalize a company or an industry, place restrictions on foreign ownership and on withdrawing sales proceeds of securities from the country, and/or impose burdensome taxes that could adversely affect security prices. These countries may also have less developed legal and accounting systems. Securities issued in these countries may be more volatile and less liquid than securities issued in foreign countries with more developed economies or markets.
Changes in currency exchange rates bring an added dimension of risk. Currency fluctuations could erase investment gains or add to investment losses. From time to time, the Fund may hedge against some currency risks; however, the hedging instruments may not always perform as the Fund expects and could produce losses. Suitable hedging instruments may not be available for currencies of emerging market countries. The risks involved in seeking capital appreciation from investments primarily in companies based outside the United States are set forth in the prospectus.
All stocks are subject to investment risk, including the risk that they may lose value. Small- and mid-capitalization stocks trade less frequently and in lower volume than larger company stocks, and thus may be more volatile and more vulnerable to financial and other risks. Compared with smaller companies, large cap companies may be less responsive to changes and opportunities. At times, the stocks of larger companies may lag other types of stock in performance.
This material is intended as a broad overview of the portfolio managers’ current style, philosophy and process. This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
The MSCI EAFE Index is a free float-adjusted market-capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. It consists of 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Standard Deviation is a statistical measure of portfolio risk describing the average deviation of the portfolio returns from the mean portfolio return over a certain period of time. The wider the typical range of returns, the higher the Standard Deviation of returns, and the higher the portfolio risk.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
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